Billionaire hedge fund manager, Paul Singer’s second quarter letter to investors warns of a bond market breakdown. Singer manages about $28 billion of investor funds at Elliot Management. In the letter, he shared his views about the current state of the US bond market (BND) (LQD). According to Singer, we’re currently in ‘the most peculiar period we have faced in 39 years.”
He said that persistent low or negative yields on sovereign debt (TLT) (SHY) have led the global (ACWI) (VEU) economy to “the biggest bond bubble in world history.” It has come to a point where he thinks that the global bond market is “broken.”
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Back in October 2015, Carl Icahn issued a warning to investors. According to Icahn, low interest rates and financial engineering led to a surge in junk bond issuances. This led the high-yield market to a dangerous level.
Back then, Icahn warned investors of a bubble in the high-yield bond market. This time, it’s Paul Singer of Elliot Management who’s warnings investors of a major bubble in the global bond market!
In his letter, Singer shared his views on:
• central bankers having too much power
• money losing its value
• inflation being almost inevitable
• investors continuing to invest in securities with low or non-existent returns
Popular bond market funds such as the Vanguard Total Bond Market ETF (BND) and the iShares Core US Aggregate Bond ETF (AGG) have returned 6.1% and 5.9% so far this year as of August 18, 2016. Short-term Treasuries have returned 1.4% so far this year, while long-term Treasury bonds have delivered a decent 18.8% YTD (year-to-date). The iShares 1-3 Year Treasury Bond ETF (SHY) invests in short-term Treasury securities, while the iShares 20+ Year Treasury Bond ETF (TLT) tracks long-term Treasury bonds. Investment-grade corporate bonds (LQD) have returned 10.6% YTD, while junk or high-yield debt (HYG) has a 9.1% return YTD.
In the next part, we’ll discuss why this might not be the biggest bond bubble in history.